Rebuilding trust in credit ratings

Confidence in any economy is contingent upon the fair assessments provided by credit rating agencies and on investors' trust in the financial information guiding their decisions. This, thus, places a fundamental duty on these agencies to act as an impartial voice and call the risks as they see them. Tragically, local rating agencies in Bangladesh failed in this duty, having been shown to promote reassuring but misleading narratives. Their credibility has come under intense scrutiny after a series of independent, foreign-led asset-quality reviews uncovered hidden bad debts and under-reported non-performing loans in several domestic banks. Consequently, the entire local rating system has been exposed as incapable of providing accurate and impartial assessments, shattering the investor confidence upon which sustainable financial growth depends.
One reason for this breakdown is a profoundly overcrowded market, with far more credit rating agencies than larger economies like India and China. Reportedly, Bangladesh has four times as many rating agencies as India and 2.6 times as many as China, despite its economy being only 8.7 per cent the size of India's and 2.4 per cent the size of China's. With so many firms competing for too few clients, agencies are forced to vie for business by offering higher ratings at lower costs rather than upholding honest standards. This has created a destructive race to the bottom. Because clients could pick and choose their most favourable rating, agencies were forced to compromise on standards as a survival tactic. When the business model incentivises pleasing the entity being rated instead of protecting the investor, the very concept of an impartial assessment becomes a tragic farce. The abrupt downgrade of First Security Islami Bank from a stable A+ to a speculative BB+, a shift that is a near financial impossibility, exemplifies this institutional failure, demonstrating conclusively that the rating industry has lost its way.
The weakness of the rating industry also poses a direct threat to Bangladesh's long-term economic ambitions, particularly the development of a dynamic bond market. The government's plan to expand this bond market, a critical step for funding infrastructure projects estimated to require $608 billion, hinges entirely on providing investors with certainty. After all, no serious investor will back a bond without a credible, independent assessment of its risk. Why would they, when the local rating agencies have proven to be either easily swayed or simply incompetent? A flawed rating industry therefore not only fails to accurately inform the investors but also actively discourages both domestic and international investment. It follows that the pressing need for hundreds of billions of dollars in investment for sectors such as power, ports and railways will remain unmet without the transparency and trust these projects require.
Without a doubt, eight agencies are too many for the market to support credibly. What's needed is a deliberate consolidation, pushed along by stricter licensing and capital requirements, until only a handful of strong and viable firms remain. This would allow the surviving agencies to prioritise quality over quantity and adhere to international standards of impartial assessment. Furthermore, mandatory and periodic re-audits of ratings by an independent body must be instituted, with agencies that consistently provide misleading grades facing severe penalties including license revocation. At the same time, Bangladesh should actively welcome reputable international rating firms. Their presence would raise the bar for everyone. The goal is to create an environment where the cost of losing credibility is higher than the cost of losing a client. Only then can these agencies be transformed into the trusted guardians of financial integrity the country so desperately needs.